Money down the drain

1he Internet companies of the country's largest conglomerates are bleeding in red
ink and burning through cash. Is it time to pull the plug?
By Heinz Bulos
August 2003

there are companies that will make
money o the Internet, experts
belieed our years ago, it would be
the country`s incumbent conglomerates.
1hey hae the experience, the money, the
networks, the installed customer base.

Indeed, many o the country`s major
corporations launched their New
Lconomy entures, with a moist eye
towards their own initial public oering
,IPO,. 1he our largest conglomerates
stood out as the most credible irms
deemed most likely to succeed: Ayala
Corporation, Benpres loldings, JG
Summit, and the Philippine Long
Distance 1elephone Co. ,PLD1,.

Ayala Corporation and PLD1 led the
charge, with the most aggressie and
ambitious oray into the New Lconomy.
iAyala and ePLD1 were well-unded and
widely diersiied. 1he Ayalas went into
wireless application and game
deelopment, B2B and B2C e-commerce,
enture capital and incubation, and data
center serices. ePLD1 got into Internet
access, contact centers, data center
serices, Internet security serices, content
deelopment, and I1 education.

1he entry o the Lopezes and
Gokongweis was a bit more tentatie and
conseratie. Benpres entered the contact
center and inormation serices businesses
under the eLopez umbrella. JG Summit
launched Summit Internet Inestments,
which went into web and content
deelopment. Another subsidiary, Digitel
Inormation 1echnology Serices, Inc.
,DI1SI,, was ormed to oer Internet
serices under the DigitelOne brand.

Ater around three or more years o
operation, how are these companies
doing In short: ery badly.

Bleeding red ink
irst, let`s look at their results rom
operations. iAyala`s 2002 net loss is
P254 million, a 63 percent decrease
rom the preious year. All its subsidiary
companies-except systems integrator
Ayala Systems 1echnology, Inc. ,AS1I,-
are in the red. AyalaPort Makati, Inc., its
high-tech and hugely expensie data
center, has been dragging the company,
contributing P32.4 million to its net loss.
AyalaPort`s actual net loss is P104.3
million, but iAyala owns only 31 percent
o the joint enture. Its enture capital
arm, Ayala Internet Venture Partners
,AIVP,, made terrible inestments in a
plethora o content and community sites
and component manuacturing
companies, and is suering or it-P35
million net loss, to be exact, on a mere
P1.8 million reenues in 2002.

ePLD1 likewise continues to lose money,
upping its operating loss to P536 million
in 2002. All its subsidiaries-with the sole
exception o Inocom, its Internet serice
proider, which inally turned a proit-
posted net losses. Contact \orld, one o
its three contact centers, contributed P102
million to that. 1he two others added P6
million to the loss. mySecureSign, a
certiicate authority ,CA,, posted a
shocking P96 million net loss on only P2
million in 2002 reenues.

Benpres is not aring any better. Its
mapping serice, BayanMAP, lost P108
I
l
million in 2002 on reenues o P million.
All its other New Lconomy subsidiaries
are losing money. In 2001, ABS-CBN
Interactie lost P85 million.

DigitelOne posted a net loss o P26
million. Summit Internet Inestments lost
P38 million on, get this, P800 tbov.ava in
2002 reenues.

Interestingly, all our are ounding
consortium members o Bayan1rade, the
leading B2B e-commerce player in the
country. And it happened to post net
losses o P196 million in 2002.

Capital deficiency
hen a company loses so much
money that its net losses exceed
the capital stock originally
inested in it, what results is capital
deiciency. And when it starts getting
adances rom stockholders, then it`s
obiously in trouble.

mySecureSign`s capital deiciency is P63
million in 2002 and receied stockholders`
adances worth P212 million to keep it
aloat. lere are other examples o capital
deiciency and adances rom
stockholders or the ollowing companies:
Contact \orld, P62 million and P133
million, Vocati Systems, P350 thousand
and P124 million, Netopia, P20 million,
iAyala, P435 million, \ireless Internet
Solutions, P35 million, AIVP, P9 million,
DI1SI, P0 million, Summit Internet
Inestments, P8 million, ABS-CBN
Interactie, P101 million, Customer
Contact Center, P90 million, BayanMAP,
P108 million and P million.


Bleeding red ink
Net
loss
Capital
deficiency
ePLD1 P536
million
mySecureSign P96
million
P63 million
Contact \orld P102
million
P62 million
Vocati
Systems
P50
million
P0.35 million
Mind Stream P12
million

Netopia P11
million
P20 million
Parlance
Systems
P26
million

iAyala P254
million
P435 million
\Net P5
million
P35 million
AIVP P35
million
P9 million
myAyala P10
million

1alent\orks P6
million

AyalaPort P104
million

DI1SI P26
million
P0 million
Summit
Internet
Inestments
P38
million
P8 million
C-Cubed P14
million
P90 million
BayanMAP P108
million
P108 million
Bayan1rade P196
million



Burn rate
Obiously, these companies are spending
more than they`re generating in reenues.
iAyala`s total expenses in 2002 was P20
million while total reenues was just P15
million. ePLD1, largely due to Inocom
and its contact centers, posted much
larger reenues, a total o P941 million,
but spent P1.5 billion in operating
\
expenses. Benpres also generated healthy
reenues o P405 million or its contact
center, spending P385 million in operating
expenses.

I you look at the expense-reenue ratio,
almost all are spending more than they
generate in reenues. lor example:
mySecureSign, 4,586, Contact \orld,
13, Vocati Systems, 140, Mind
Stream, 155, Netopia, 293, iAyala,
1,83, \Net, 43, AIVP, 1,996,
myAyala, 22, Summit Internet
Inestments, 4,914, BayanMAP, 43,
and Bayan1rade, 402 .

I we are to compute the burn rate in
terms o the number o days beore it
runs out o cash ,one way to compute this
is to add up cash, accounts receiables,
and marketable securities, then diide it by
the daily operating expenses, i.e., total
operating expenses diided by 365 days,,
Inocom`s cash is good or around 6
months, mySecureSign, close to 2 months,
Contact \orld and Vocati Systems, 5
months, Parlance Systems, 6 months,
Mind Stream, 3 months, and Netopia, 1
month.

iAyala has months to go beore it runs
out o cash, \Net, months, and
myAyala, 1 year. C-Cubed will last close to
3 months, BayanMAP, around 22 days.
Bayan1rade has 2 months.

O course, keep in mind this calculation is
based only on how ast these companies
burn cash gien their operating expenses
and the cash balance as o the end o
2002. It doesn`t take into account
increases in reenues, decreases in
expenses, and additional inusion o
capital.


Burn rate
Cash
+
A/R
Operating
Lxpenses
Burn
rate (in
months)
Inocom P16
million
P351
million
5.8
mySecureSign P4
million
P29
million
1.8
Contact
\orld
P49
million
P123
million
4.9
Vocati
Systems
P56
million
P143
million
4.8
Mind Stream P14
million
P55
million
3.1
Netopia P2
million
PP18
million
1.4
Parlance
Systems
P5
million
P15
million
5.8
iAyala P34
million
P58
million
.2
\Net P6
million
P10
million
6.9
AIVP P39
million
P million 62.3
myAyala P21
million
P20
million
12.5
Summit
Internet
Inestments
P14
million
P0.96
million
186.5
C-Cubed P83
million
P385
million
2.6
BayanMAP P1
million
P31
million
0.
Bayan1rade P4
million
P261
million
2.2



Restructure and consolidate
t`s no wonder these conglomerates
hae made drastic steps in
rationalizing their IC1 businesses.
iAyala shut down LDINet Philippines,
Inc. and Ideaarm, Inc. Its 2002 annual
report noted: iAyala continued to adopt a
prudent inestment approach, with resh
und inusions limited to those inestee
companies that were able to meet rigid
I
operating milestones, as well as put
orward a solid business case and
execution plan that can bring the business
to a inancially sel-sustaining leel in the
near term.`
It added on its \eb site: \ith the
waning interest in technology inesting by
enture capitalists worldwide and the
lacklustre perormance o public equities
markets, AIVP has set more realistic
expectations about exit strategies, exit
timing and aluation. AIVP's ocus will
continue to eer away rom unding risky
start-ups towards proen business models.
1he company's priority is to build and
nurture its portolio companies by inding
strategic partners and helping ramp-up
reenue generation and achiee
proitability.` It also pared down expenses
across the board. Lxpenses or \ireless
Internet Solutions are down 53 percent.
AIVP`s expenses decreased by 42 percent.
ePLD1 sold its 51 percent stake in
e\P.ph Corporation, an online directory.
But it continues to increase its operating
expenses due principally to the ull
commercial operations o its subsidiaries.
DI1SI, on the other hand, has been
olded back to Digital
1elecommunications, Inc. ,Digitel,. It has
long closed Latitude \eb, a joint enture
web deelopment studio. Jobstreet
Philippines is now lodged with Summit
Media. Lxpenses dramatically decreased
or DI1SI, rom P361 million in 2001 to
P14 million in 2002.

ABS-CBN wrote o its subsidiary,
PinoyAuctions.com , as a one-time charge
o P1.9 million. In its 2002 annual report,
it noted: In line with the Company`s
decision to ocus on its core businesses
and conduct a rigid reiew o its
subsidiaries, ABS-CBN decided to cease
operations o seeral subsidiaries that
were deemed not critical to the success o
the main business.`

Light at the end of the tunnel
here are potential winners in their
portolio, to be sure. lor iAyala,
AS1I, with a decade o experience
in the industry, will continue to contribute
the bulk o its reenues and net income.
In 2001, I1 Resource ranked AS1I
number eight in the systems integrators
category in terms o reenues. Although
2002 reenues were down 28 percent due
to the sharp decrease in I1 spending, the
systems integrator remains a major player,
and will beneit rom the impending
recoery in the tech sector.

Ironically, its non-tech subsidiary,
1alent\orks Asia, Inc., ,a talent agency
and eents management company, posted
the largest jump in reenues, o course
coming rom a smaller base. Neertheless,
it registered reenues o P10.9 million,
more than iAyala`s wireless and Internet
entures. But it`s strange to hae an
entertainment agency in iAyala`s portolio.

myAyala, the country`s largest online mall,
managed a 45 percent increase in sales,
partly by reocusing its strategy to sere
oerseas lilipinos, and more importantly,
by inding other sources o income, like
\eb and SMS deelopment and hosting.
But it`s still spending a lot. Another bright
spot is its Game Deelopment Diision,
which booked P9.2 million in reenues.

And then, o course, there`s Globe
1elecoms` wireline data and Internet
serices under the GlobeQuest brand.
Although outside iAyala`s responsibility,
GlobeQuest proides real business to
Ayala Corporation, contributing P1.1
billion in reenues in 2002. I Ayala
Corporation grouped this with iAyala, it
will match, een surpass, ePLD1`s
reenues.
1

ePLD1, on the other hand, seems to be
doing well with its contact centers. Its
irst, Contact \orld, posted a 101 percent
increase in reenues o P0 million. Its
two other contact centers registered
combined reenues o P233 million.

Inocom also increased reenues to P16
million and registered a net income o P25
million. Netopia, its chain o Internet
caes, reported a 359 percent jump in
reenues o P6 million. And Vitro, its
anchor business, posted P296 million in
sales. All told, ePLD1 doubled its
reenues in 2002 to P941 million.

eLopez is likewise doing well with its
Customer Contact Center, or C-Cubed,
with reenues o P405 million, up by 241
percent, and it was able to cut its losses by
81 percent to P14 million.

It`s also raking in cash rom ABS-CBN
Interactie, which initially struggled with
\eb portal PinoyCentral, but has since
reinented itsel by tying up ABS-CBN`s
popular teleision programs with SMS-
based eedback and promotional
campaigns. \ith the hit game show Game
KNB, particularly in its text partner
segment, it`s reported that ABS-CBN
receies 00 thousand entries daily and
generates reenues o P million a week.
ABS-CBN`s other broadcasting-related
reenues, which largely comes rom ABS-
CBN Interactie, soared rom P51 million
in 2001 to P395 million in 2002. Len
Bayantel`s data and Internet serices,
which is reported under the Lopez`s
troubled telecommunications irm,
increased reenues 1 percent to P1.4
billion.

It`s only JG Summit that doesn`t seem to
hae a potential winner in its hands. Its
Internet serice proider lost money and
saw reenues all by 53 percent to P168
million. Its Internet inestments arm
appears to be close to liquidation, as een
its only substantial inestment,
Bayan1rade, is losing money. Its popular
content and community sites are likewise
not making money.

1ime to pull the plug?
hese conglomerates may want to
cut o more than they hae
already done. lor instance, iAyala
may want to stop playing enture capitalist
altogether, as AIVP is simply draining its
resources-expenses o P63 million in
2001 and P3 million in 2002, largely due
to net losses o its subsidiaries and
proision or decline in alue o
inestments in shares o stocks. It could
hold on to its \ireless Internet Solutions
subsidiary and just treat it as Globe
1elecoms` source o R&D.

I myAyala increases reenues by 45
percent and cuts costs by 9 percent as it
had in 2002, it could start realizing a proit
by 2004. But that`s dependent on how
well they sell to oerseas lilipinos, which
in itsel will cost a lot. Interestingly, actual
commission rom sales orders did not
een reach P2 million. 1he bulk o its
reenues in act came rom non-core
reenues-creating and hosting \eb sites
and deeloping SMS applications. As or
AyalaPort, it may be too late and too
expensie to write it o, established when
eeryone thought there will be an
explosion in demand or data centers.

ePLD1`s problem is mySecureSign, which
has-pardon the pun-no signs o
generating enough reenues. It might also
consider dumping Mind Stream, which
runs the NII1 ranchise in the country. As
it is, there are already too many I1 schools
competing in all market segments.
Netopia is a small operation that won`t
contribute much to ePLD1`s reenues
and bottom line. But the company can use
1
the Internet ca chain as a distribution
channel.

lor eLopez, BayanMAP is a more
questionable inestment. It doesn`t seem
to it in its oerall strategy. And Summit
Internet Inestments ought to be olded
to Summit Media altogether.

Best strategy
here are two conglomerates that
will beneit most rom these IC1
inestments: Ayala Corporation
and PLD1. Both are strong players in
telecommunications, including wireless,
wireline, Internet, and data serices.

Ancillary companies that reole around
their core businesses or take adantage o
their existing inrastructure, such as
contact centers, content and application
deelopment, Internet access, and data
centers make business sense, as long as
there`s demand or them, o course.
ePLD1, or instance, has its contact
centers, data center, and Internet access
business. iAyala has its data center and
application deelopment business.

Len Benpres is able to build new
segments around its core businesses. ABS-
CBN Interactie rides on ABS-CBN, or
instance. But the Lopez group and the
Gokongwei group hae not been as
successul in this regard.

It`s not too late in the game, as these New
Lconomy subsidiaries hae been set up
less than our years ago. Many o them are
still in the inestment stage, when costs
are expected to exceed reenues. But as
can be seen rom the igures we cited, we
can already spot trends and identiy
winners and losers. By ridding themseles
o unproitable and unrelated subsidiaries,
ePLD1 and iAyala-i we also include
GlobeQuest-are in the best position to
succeed.



1